I bought a modest house in southern California about one year ago. I was naïve and rushed into the decision. Not news: It was a mistake. I didn't even know the differences between revolving credit and a secured loan, but a government-backed loan made it very easy for me to get into a mortgage. Also not news: Now I am underwater.
Anyone who hasn't educated themselves on the banking industry, the housing market, and its ties to the currently trashed economy needs to read this: Study: Moral and Social Constraints to Strategic Default on Mortgages. I'm sure it has circulated among many of the users here.
The relevance of that paper may not be immediately clear. Obviously, foreclosure rates are high. There are a lot of statistics, but the real lesson is that the banking industry depends on individual morality and social pressure as levers to prevent strategic defaults. Which of course is a hoot. But I wouldn't have seen it that way in 2008. I was a good American achieving the American Dream.
After a year of making additional principal payments and acting in what I thought was a financially responsible manner, I am now selling every non-essential item of value that I own to further build my savings account. I'm not as far underwater as some in my area, but I will be moving soon (employer-mandatory) and have to be prepared to operate without an awesome credit score. Read: default.
Another thread (Fatwallet: PBS Frontline Special...) with this Bill Moyers interview (PBS: Bill Moyers Journal) brought a sort of epiphany for me. If you have guts, you should take 15 minutes to listen to the interview, think, and then do some of your own research. Rep. Kaptur is of course a politician, but both guests are frank and intelligent in their commentary.
Wall Street is consolidated and entrenched, and they are raping us in ways we will be feeling for a very long time. Keep casting ballots and being a Good American if that helps you sleep at night. There are other ways to effect change; the dollar really is almighty.
Edit: I want to clarify a few points. Paragraph 1: I respectfully encourage anyone considering purchase of a house to educate yourself thoroughly ahead of time. I put the cart before the horse. Paragraph 4: I am currently preparing my house to rent, and I am clearly modifying my lifestyle to compensate for monthly losses. However, if I calculate that the debt owed will eventually ruin me, then... Paragraph 6: ...I will not live in a state of denial about the power structure that now exists in the financial system, and I will decide my future accordingly, without regard to any sort of social stigma. The old days are over, folks.
If everyone default, then the whole evil banking industry will go belly up. So does the US government. Then the real solution can finally arrive. The US banks will longer dare to make risky bets and not worry if they should ever lose since by then US government won't be able to bail those blood-suckers out. American won't be able to live their lives on borrowing money since no foreigners will ever lend money to the US. We don't need financial innovations, what we really need is science and technology innovations. If US can turn science fiction figure into reality some day, that will put Hollywood to drawing board to figure out something new. I have no sympathy to the banks since the top of the brass are rotten to the core. They never really care the firm they manage like parents do to their family. All they want to risk-free personal gain. Second, if default your loan is bad, what makes you think owning real/personal property by meaning of borrowing. It's a bad idea in many parts of the world which prompts savings and frugality but not consumerism. I bet the price of US home will come down a lot if home must be paid with cash but not loan. Then home will be very cheaper and Americans won't trap in debts through almost entirety of adult life. All in all, debt is a morally bad idea.
codename47
Senior Member - 3K
posted: Nov. 9, 2009 @ 7:39a
Obviously, foreclosure rates are high. There are a lot of statistics, but the real lesson is that the banking industry depends on individual morality and social pressure as levers to prevent strategic defaults. That's a good start
If everyone default, then the whole evil banking industry will go belly up. You don't even need that many. If 10% of all people made business decisions instead of ethical ones it would all grind to a halt.
Zro
Member
posted: Nov. 9, 2009 @ 8:41a
codename47 said: If 10% of all people made business decisions instead of ethical ones it would all grind to a halt.
Sucks that corporate America can be capitalistic but its citizens can't.
codename47
Senior Member - 3K
posted: Nov. 9, 2009 @ 9:41a
why can't we be capitalistic? There is nothing stopping most people but themselves...and their precious credit scores...
Zro
Member
posted: Nov. 9, 2009 @ 10:51a
Not to be argumentative (because, quite honestly, I would probably lose), but you seemed to imply that a business decision and an ethical decision were mutually exclusive in the context of contract law (specifically, mortgage). It would be laughable to bring up ethics for a CRE subsidiary LLC if/when it defaults on a loan.
Trojan35
Member
posted: Nov. 9, 2009 @ 11:04a
codename47 said: Obviously, foreclosure rates are high. There are a lot of statistics, but the real lesson is that the banking industry depends on individual morality and social pressure as levers to prevent strategic defaults. That's a good start
If everyone default, then the whole evil banking industry will go belly up. You don't even need that many. If 10% of all people made business decisions instead of ethical ones it would all grind to a halt.
You act like business decisions and ethical decisions are two separate things. This is one of the reasons we're in this mess, because they shouldn't be separate at all.
ls7corvete
Member
posted: Nov. 9, 2009 @ 1:14p
canvflaz said: There are a lot of statistics, but the real lesson is that the banking industry depends on individual morality and social pressure as levers to prevent strategic defaults.
How dare them expect people to feel a moral/social pressure to pay back money they owed. They are obviously evil to think this.
sychan said: If everyone default, then the whole evil banking industry will go belly up.
If borrowers dont pay back lenders the lenders will go belly up? Interesting...
I thought the "recent market volatility" thread was bad. The housing market threads have the crown now. Anyone proposing a fight club solution yet?
canvflaz said: I bought a modest house in southern California about one year agoYou should not be much underwater in just a year; the past 4 months were a seller's market for modestly priced SoCal homes with many bidding wars.
xoneinax said: canvflaz said: I bought a modest house in southern California about one year agoYou should not be much underwater in just a year; the past 4 months were a seller's market for modestly priced SoCal homes with many bidding wars.
Like you, I thought SoCal housing on the lower end had bottomed out back then, but maybe not. Specifics were omitted, along with whether or not a down-payment was made.
Are you thinking that OP is just looking for a reason to rationalize walking away from the loan?
Mickie3 said: Like you, I thought SoCal housing on the lower end had bottomed out back then, but maybe notThough I am very skeptical of any bottoming, from October 2008 to November 2009 lower end (under 417k) SoCal SFR has not seen that much of a decline. Maybe OP is in Inland Empire; I dont follow that too much.
canvflaz said: Wall Street is consolidated and entrenched, and they are raping us in ways we will be feeling for a very long time. Keep casting ballots and being a Good American if that helps you sleep at night. There are other ways to effect change; the dollar really is almighty. The problem with wall st is they blatantly own the Congress, who quite literally steals from us to give it to the largest banks... This is the reason why the dollar is anything but almighty, as well.
Wall St and their biach, our congress, are raping us by trying to keep these home "values" so damn astronomical. A correction in these prices is what caused you to go under water, not some conspiracy to make you poor... You were speculating, your risk was notcontrolled and you were overleveraged with no real exit strategy...
Thus, you suck at speculating and now don't get to do it anymore No gambling for you!
tester99
Member
posted: Nov. 9, 2009 @ 2:34p
Canflaz you are not the only one and you are barely touching on the massive fraud that has been committed here.
I would encourage anyone who would like to educate themselves further to also read-Bailout Nation by Barry Rithotz to understand how screwed up we really are.
Those that say that you need to suck it up and pay your bill have no idea how this fraud was played out.
Something needs to be done and I wonder why we cant see something like a mortgage restructuring plan that really is not a bailout in the sense that underwater homeowners could surrender their future equity gains to a govt created entity.
Please feel free to tell me why something like this would not work, besides the obvious banking lobby machine.
But what if we created a tiered mortgage plan, where debt was forgiven according to the borrowers wishes. If you needed a full reduction to current value you surrendered all of your future gains. If you needed 20% forgiven You surrendered 20% when you sell or die. If you participate in the plan you can no longer use your property as leverage. You must satisfy what you owe.
The benefits of something like this seem to far out number the negatives. In most cases were dealing with credit worthy borrowers who for a variety of reasons are stuck. Make the plan for those that have payed on time, great credit, etc? Again this is more of a surrender of future gains to reduce debt load.
Benefits that might come from this 1. Neighborhood stabilization. 2. Reduced Inventories-people stay put and don’t strategic default. 3. Property taxes paid, good for the local govt's. 4. Personal spending increases as a result, real car sales, investments, purchases. 5. Relieve financial stress 6. Shore up bank's bottom line 7. Reduce the amount of toxic paper on the banks books that still may default.
Chris Dodd was wondering what we will do to stop people from throwing up their hands and walking away when he was questioning HUD Sec Donavan last month and he basically said he didn’t see it as a problem. He said people were too attached to their neighborhoods to do such a thing. I can say from experience that the people I talk to that are doing this do not live in such a fantasy. They are doing it and it is increasing because there is no incentive to keep paying. Why not give people an incentive to stay?
Don’t forget Mr.Greenspan's words back in 2005 about new mortgage products "Innovation has brought about a multitude of new products, such as sub prime loans and niche credit programs for immigrants...With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers...Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in sub prime mortgage lending...fostering constructive innovation that is both responsive to market demand and beneficial to consumers."
Substitute tiered mortgage forgiveness for sub prime and which one will history judge more favorably?
I look at this plan as an opportunity, would it need allot of work, not really. It just needs some support.
People confuse ethical decisions with legal contracts. If you signed the contract stating that you'll bend over and drop down your pants and then somebody enforces the contract, there is nothing unethical about it. The only thing unethical would be is you were forced to sign the contract under duress. People got greedy and dropped their pants.
tester99 said: Don’t forget Mr.Greenspan's words back in 2005 about new mortgage productsHis cultlike devotion to Ayn Rand'ian thinking brought us to the brink of another Great Depression
staci86
Senior Member
posted: Nov. 9, 2009 @ 2:48p
Even though your home is a place to live, you are treating it like it is an investment first, and a residence second. You took a risk buying property.
Were you planning on giving the bank a chunk of your equity if the value went up, or do you only expect the bank to eat equity losses when the value goes down?
If you aren't comfortable with the thought of gambling with borrowed money, then either don't buy a home, or don't buy a home thinking of it as a speculative investment.
tester99
Member
posted: Nov. 9, 2009 @ 3:03p
"Were you planning on giving the bank a chunk of your equity if the value went up"
That is what I'm proposing.
smite
New Member
posted: Nov. 9, 2009 @ 3:05p
staci86 said: Were you planning on giving the bank a chunk of your equity if the value went up, or do you only expect the bank to eat equity losses when the value goes down?
I, for one, am really tired of hearing this argument. If the contract that was signed stated as much, then sure the borrower would expect that, but obviously no contract states that the borrower to share equity if the value goes up so it is unreasonable to suggest the OP have this expectation. The bank is in the position to judge credit worthiness and risk. The bank is in the position to extend the contract on their terms. The bank ordered the appraisal through their preferred appraiser and accepted the appraisal as valid.
Sure the borrower has a responsibility in all of this, but they are well within the terms of the contract to stop paying if they deem it not within their best interests. Period.
tester99
Member
posted: Nov. 9, 2009 @ 4:37p
Let's see we have bank bailout's, insurance , car-maker's, those that have a fannie or freddie loan, hedge funds, all the strings being pulled to keep the market going, healthcare for all gets rammed through congress and this today
Fannie Mae said Monday it may have to ask the government for more financial assistance because the company cannot sell $5.2 billion in tax credits.
But a proposal that is not a bailout, but a surrender, cannot find any support from anyone. Go figure.
canvflaz
New Member
posted: Nov. 9, 2009 @ 5:19p
Mickie3 said: xoneinax said: canvflaz said: I bought a modest house in southern California about one year agoYou should not be much underwater in just a year; the past 4 months were a seller's market for modestly priced SoCal homes with many bidding wars.
Like you, I thought SoCal housing on the lower end had bottomed out back then, but maybe not. Specifics were omitted, along with whether or not a down-payment was made.
Are you thinking that OP is just looking for a reason to rationalize walking away from the loan?
I am not in the Inland Empire, and as stated in the original post, my situation is not as bad as some in my area.
I have determined a way forward that, for the time being, is sustainable given my income and does not involve default. However, people will go to the brink of financial ruin before defaulting on a mortgage due to some perceived amorality. Obviously, given the current Wall Street / Washington DC power complex, I find that absurd.
canvflaz
New Member
posted: Nov. 9, 2009 @ 5:33p
couponhed said: Just give us your bill. We'll pay it.
signed, the public
It is absolutely telling that this post would receive so much green versus the original.
canvflaz said: Another thread (Fatwallet: PBS Frontline Special...) with this Bill Moyers interview (PBS: Bill Moyers Journal) brought a sort of epiphany for me. If you have guts, you should take 15 minutes to listen to the interview, think, and then do some of your own research. Rep. Kaptur is of course a politician, but both guests are frank and intelligent in their commentary.
canvflaz said: Mickie3 said: xoneinax said: canvflaz said: I bought a modest house in southern California about one year agoYou should not be much underwater in just a year; the past 4 months were a seller's market for modestly priced SoCal homes with many bidding wars.
Like you, I thought SoCal housing on the lower end had bottomed out back then, but maybe not. Specifics were omitted, along with whether or not a down-payment was made.
Are you thinking that OP is just looking for a reason to rationalize walking away from the loan?
I am not in the Inland Empire, and as stated in the original post, my situation is not as bad as some in my area.
I have determined a way forward that, for the time being, is sustainable given my income and does not involve default. However, people will go to the brink of financial ruin before defaulting on a mortgage due to some perceived amorality. Obviously, given the current Wall Street / Washington DC power complex, I find that absurd.
It may seem absurd to you, but there actually are people who will try to keep their promises.
If your employer promised you $50/hour and on payday paid you $2.50/hr, would you have any respect for them? Didn't think so.
tester99
Member
posted: Nov. 9, 2009 @ 6:44p
"It may seem absurd to you, but there actually are people who will try to keep their promises."
Like when Greenspan promised to uphold the constitution even though he admits his philosophies are in direct conflict with the document.
And what is the difference between an underwater loan held by Fannie/Freddie and one that is not?
ColbyS said: codename47 said: why can't we be capitalistic? There is nothing stopping most people but themselves...and their precious credit scores... People keeping their scores on a pedestal are either in denial or just plain stubborn.
A family member of mine, a senior citizen, has far better credit than I could ever possibly hope to achieve. But guess what?
She can't get 10% of the credit lines (now) that I was able to get from 1997-2007.
So there you go.
I'm not sure I understand. Could you get 1% of the credit lines, now, that you could from 1997-2007 -- or that she could have gotten from 1997-2007? I don't understand how that's bad for your family member, particularly if she doesn't care and doesn't need it, while you do care and do need it (want it). There's probably a good point in there, just should have not mixed apples (your family member) and oranges (yourself).
Also, what is the denial about scores (besides manipulation making them irrelevant, a manipulation which is encouraged here)?
ColbyS said: A family member of mine, a senior citizen, has far better credit than I could ever possibly hope to achieve. But guess what? She can't get 10% of the credit lines (now) that I was able to get from 1997-2007Great credit is only beneficial if you need it. Great credit can get you the best available interest rate when purchasing a home, the most expensive financed purchase that most of us will ever make, and that lowest interest rate can save you tens of thousands of dollars. But if you have no need to leverage your great credit, it is almost useless; senior citizens are not typically buying expensive homes.
Cerdo
Senior Member
posted: Nov. 9, 2009 @ 10:33p
The problem is a "heads i win, tails you lose" mentality of the US public.
I posted the strategic default paper in the thread about FHA loans, and some dolt with the s/n of Fairlight Racing is still arguing that higher downpayments don't reduce defaults, when every bit of existing evidence shows that they higher the downpayment, aka skin in the game, the less likely the borrow is to default.
BTW, I don't blame you one bit. The only thing that makes me mad is that the government is guaranteeing mortgages and providing bailouts for those who make poor decisions and want to socialize the losses.
Cerdo
Senior Member
posted: Nov. 9, 2009 @ 10:35p
xoneinax said: ColbyS said: A family member of mine, a senior citizen, has far better credit than I could ever possibly hope to achieve. But guess what? She can't get 10% of the credit lines (now) that I was able to get from 1997-2007Great credit is only beneficial if you need it. Great credit can get you the best available interest rate when purchasing a home, the most expensive financed purchase that most of us will ever make, and that lowest interest rate can save you tens of thousands of dollars. But if you have no need to leverage your great credit, it is almost useless; senior citizens are not typically buying expensive homes.
The worst thing to ever happen to the American consumer is loan products, AKA mortgage. People paying cash make rational decisions. Having a 30 year loan on anything seems plain silly to me. It forces people to payment shop instead of purchase price shop. How many people do you know who can afford a $500 a month payment but would never pay $35,000 for a vehicle?
Zro
Member
posted: Nov. 10, 2009 @ 12:35a
Cerdo said: The worst thing to ever happen to the American consumer is loan products, AKA mortgage. People paying cash make rational decisions. Having a 30 year loan on anything seems plain silly to me. It forces people to payment shop instead of purchase price shop. How many people do you know who can afford a $500 a month payment but would never pay $35,000 for a vehicle?
Wiki says that religious temples were probably the first banks of the world which lent to merchants. So, unless you are talking about the Native American consumer, Americans have lived with loan products all their lives. And, contrary to what you have probably heard, you don't have to stay in the loan for the whole term amount.
Oh, I bought a snickers bar at the convenience store earlier today and I was kinda thinking it was an impulse buy. Glad to see I rationalized the decision somewhere there.
Cerdo
Senior Member
posted: Nov. 10, 2009 @ 7:10a
Zro said: Cerdo said: The worst thing to ever happen to the American consumer is loan products, AKA mortgage. People paying cash make rational decisions. Having a 30 year loan on anything seems plain silly to me. It forces people to payment shop instead of purchase price shop. How many people do you know who can afford a $500 a month payment but would never pay $35,000 for a vehicle?
Wiki says that religious temples were probably the first banks of the world which lent to merchants. So, unless you are talking about the Native American consumer, Americans have lived with loan products all their lives. And, contrary to what you have probably heard, you don't have to stay in the loan for the whole term amount.
Oh, I bought a snickers bar at the convenience store earlier today and I was kinda thinking it was an impulse buy. Glad to see I rationalized the decision somewhere there.
While loan products have raised the standard of living of the American consumer, allowing us to have more, they have also raised the prices on everything as well. The whole problem with homes is that many people payment shop without considering the true long term implication to their finances. How often have we heard that renting is like throwing money out the window? Owning a home and being a slave to the payments is significantly worse. This doesn't matter if your income can support the payments, savings, etc, but then again if that was the case we wouldn't be in this economic mess would we?
So what do you do about the loans that this plan does not reach? Are those people any different than these? Why are some "speculators" more worthy of a modification than others?
Nonaii
Senior Member
posted: Nov. 10, 2009 @ 12:42p
ColbyS said: My point is that you should make financial decisions that are best for you and your family's well-being which may or may not be good for your credit score. Ah. Ok. I agree with you there. As long as there is balance, and research involved (and no family identity theft involved).
canvflaz said: Edit: I want to clarify a few points. Paragraph 1: I respectfully encourage anyone considering purchase of a house to educate yourself thoroughly ahead of time. I put the cart before the horse. The entire real estate industry is still due for massive correction. Without intervention it would of happened by now. Now it will take several decades. Buying a house is foolish. The gov is not pushing 8-15k credits because RE is undervalued (or properly valued).
Cerdo
Senior Member
posted: Nov. 10, 2009 @ 10:57p
ColbyS said: canvflaz said: Edit: I want to clarify a few points. Paragraph 1: I respectfully encourage anyone considering purchase of a house to educate yourself thoroughly ahead of time. I put the cart before the horse. The entire real estate industry is still due for massive correction. Without intervention it would of happened by now. Now it will take several decades. Buying a house is foolish. The gov is not pushing 8-15k credits because RE is undervalued (or properly valued).
Best post I've read all day. We are nowhere near the end, regardless of what the national media says.
smite said: Sure the borrower has a responsibility in all of this, but they are well within the terms of the contract to stop paying if they deem it not within their best interests. Period. Well I'm glad it's settled then! Are there other contracts we can violate to our benefit and still be within the terms?
ColbyS said: Actually, in an ideal world, we would be paying for our houses in cash like our great-grandparents were doing a century ago.
Hell yeah...and houses would cost roughly the median annual salary, not 4x-10x that amount. Part of that is shoving 8 people in a 2BR/1BA house, but there has definitely been some inflation well in excess of salaries (engendered by the lender...hey, that rhymes).
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